The stock market is strengthening as earnings season rolls on; the Nasdaq and Dow both hit new highs yesterday. Consumer spending, pending home sales and consumer confidence numbers all beat expectations last week.
Friday brought a nice “Goldilocks” jobs report, at least from the market’s perspective. The headline jobs number beat expectations, but wage growth fell short and the unemployment rate ticked up, due to improvement in the labor participation rate. The message to the market was that the economy is strong, but the Fed probably won’t have to hike rates anytime soon. The odds of a March hike fell to 19% immediately after the report was released, and the 10-year yield has declined from 2.5% to 2.38%.
Oil prices are also declining as U.S. production increases, and energy stocks have slipped. The latest addition to our portfolio, Schlumberger (SLB), is still rated Buy, but more risk-average and short-term investors should wait for the pullback to end first.
We’ve also had a few bad earnings surprises from our portfolio companies in recent weeks. I recommended selling UPS (UPS) in a special bulletin sent Friday, and also put ADP (ADP) on Hold. Mattel (MAT) is still rated Hold, but could be sold if it fails to recover, while General Motors (GM) is still rated Buy but has pulled back further after yesterday’s earnings report.
Investors looking to put money to work will find the best options in the Dividend Growth and Safe Income tiers; Carnival Corp (CCL), Costco (COST), Prudential Financial (PRU), U.S. Bank (USB), and Home Depot (HD) are all buyable today. And Safe Income laggard J.M. Smucker (SJM) could make it back to the Buy list soon ... the company reports earnings at the end of next week.
HIGH YIELD TIER
BUY – Game Stop (GME 25 – yield 6.0%) – GME crept up 2% this week, despite some weakness in consumer discretionary stocks, reinforcing our view that the weak hands have been pretty well shaken out. Risk tolerant high yield investors can add GME here.
Next ex-div date: March 6, 2017 est.
BUY – General Motors (GM 35 – yield 4.3%) – GM reported strong earnings yesterday, but the stock pulled back in response to a bad surprise from Europe. Fourth quarter EPS of $1.28 and revenue of $43.9 billion both beat estimates. For the full year, EPS grew 22%, to $6.12 per share, better than expected. Revenue rose 9.2%, to $166.4 billion; analysts were expecting 7% growth. Margins also improved in 2016, hitting a record high of 7.5%, as GM offered fewer incentives and customers opted for higher-margin crossovers and SUVs. Management reiterated their 2017 earnings guidance of $6.00-$6.50 per share. European performance put a damper on things though. GM had been projecting a return to profitability in Europe this year, but now says the impact of Brexit will result in another loss. The stock retreated nearly 5% on the news, and is now trading below its 50-day moving average but above support from the end of last year. GM is a volatile but undervalued stock; high yield investors with high risk tolerance can nibble once its stabilizes.
Next ex-div date: March 8, 2017 est.
HOLD – Mattel (MAT 26 – yield 5.9%) – MAT continues to trade sideways around 26. Competitor Hasbro reported earnings and sales that slayed estimates Monday, sending the stock up 11%. Management credited an entertainment-focused approach and active listening to consumers. Mattel looks to be lagging behind by comparison, although the company is getting a new CEO in April (and she comes from Google). MAT is a Hold for now.
Next ex-div date: February 14, 2017
BUY – Pembina Pipeline (PBA 31 – yield 4.7%) – High yield investors looking for a source of monthly income should consider Pembina, a Canadian pipeline company. The stock is currently stuck in a trading range between 28 and 32, but long-term a recovery in oil prices and energy stocks should lead to solid returns for investors.
Next ex-div date: February 22, 2017
DIVIDEND GROWTH TIER
SOLD – AbbVie (ABBV 61 – yield 4.2%) – We sold AbbVie in last Wednesday’s update, at the day’s average price of 60.69. The stock has been underperforming for approximately five months, and last week’s earnings numbers failed to impress. We’ve recorded a 9% loss on the position, not including dividends.
Next ex-div date: April 12, 2017 est.
BUY – Carnival (CCL 55 – yield 2.5%) – After breaking out to new highs at the end of January, CCL has pulled back slightly and is consolidating near 55. CCL is a Buy for dividend growth investors with moderate risk tolerance.
Next ex-div date: February 22, 2017
BUY – Costco (COST 168 – yield 1.1%) – COST gapped up over 2% after the warehouse retailer reported January sales results last week. Costco’s net sales grew 9% year-over-year, and comp sales growth ticked up to 7%, or 5% excluding the impact of gas prices and currency swings. COST is now trading right below is 52-week highs from August. The stock faces resistance here, but a breakout above 170 would be a very bullish sign.
Next ex-div date: February 8, 2017
BUY – Prudential Financial (PRU 107 – yield 2.6%) – Prudential will report full-year and fourth-quarter 2016 results after the market closes today. For the fourth quarter, analysts are expecting EPS of $2.32, up 19.6% year-over-year, despite 8.7% lower revenues of $12.09 billion. For the full year, revenues are expected to be slightly higher than in 2015, up 3.2% to $50.17 billion, while EPS are expected to decline 10.5% to $8.99 per share.
Next ex-div date: February 19, 2017 est.
BUY – Schlumberger (SLB 81 – yield 2.5%) – Schlumberger was added to our portfolio at last Wednesday’s average price of 83.57. The stock is a few points lower today, trading around 81, due to a pullback in energy stocks. Risk-tolerant dividend growth investors can take advantage of the pullback to start positions. More risk-averse or shorter-term investors may want to wait for SLB to pull up first. If the energy industry rebound stalls, the stock could chop around between 75 and 85 for a while. Analysts aren’t lowering estimates though; SLB has received 10 upward revisions and one downward revision in the past 30 days.
Next ex-div date: February 13, 2017
BUY – U.S. Bancorp (USB 53 – yield 2.1%) – After consolidating its post-election gains in December and early January, USB pulled back just enough to kiss its 50-day line in mid-January, before pushing out to new highs this month. After years of waiting, it looks like the time has finally come for financial stocks. Interest rates are rising, the yield curve is finally a tiny bit steeper, and financial regulation is in the cross hairs of several branches of government. USB is a Buy for all investors, ideally on pullbacks.
Next ex-div date: March 29, 2017 est.
HOLD – Wynn Resorts (WYNN 97 – yield 2.1%) – WYNN retreated to the upper third of its trading range this week, an expected pullback after late January’s 10% surge. January gaming numbers from Macau were a little lighter than expected; analysts are blaming a slowdown ahead of Chinese New Year. Wynn’s new property in the Chinese territory is performing better than expected though, and Goldman Sachs raised their earnings estimates last week. WYNN is a Hold for risk-tolerant investors.
Next ex-div date: February 10, 2017
SAFE INCOME TIER
BUY – Automatic Data Processing (ADP 96 – yield 2.4%) – I put ADP on Hold in Friday’s special bulletin, after the stock’s post-earnings drop to 95. Earnings actually beat estimates by a wide margin, but revenues fell short because the company isn’t gaining new customers. And customer numbers are expected to stay flat for the next six months, prompting management to revise their 2017 revenue guidance downward. EPS guidance is unaffected, as management offsets the slowdown in signups by improving margins and growing revenue per existing customer. The stock appears to have found support just above 95, where it built a short base in early December. I’ll keep it rated Hold for now.
Next ex-div date: March 8, 2017
HOLD – Consolidated Edison (ED 75 – yield 3.7%) – New York-area utility ConEd will report fourth quarter and full-year 2016 earnings on February 16. Analysts are expecting fourth quarter revenues to be up 1.3%, to $2.74 billion, while fourth quarter EPS are expected to rise 8.2%, to $0.66. For the full year, revenues are expected to decline 1.7%, to $12.34 billion, while EPS are expected to fall 2.9%, to $3.96. ED is a Hold for long-term income investors.
Next ex-div date: February 13, 2017
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.4%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 25 – yield 4.9%)
These four funds make up our bond ladder, a conservative strategy for owning fixed income that’s particularly good at preserving capital when interest rates are rising. Each ETF will mature at the end of the year in the fund’s name, and Guggenheim will distribute the net asset value (NAV) of the fund to shareholders at that point—just like getting your principal back when a bond matures. Because of this maturity feature, these bond funds don’t lose value when interest rates rise, like traditional bond funds. Guggenheim offers two series of BulletShares funds for each year—one that holds investment grade corporate debt and one that holds high yield (or “junk”) debt. The high yield ETFs obviously yield more, but come with a higher risk that some of the securities in the ETF will default, causing the fund to lose value (they also have higher expense ratios of 0.44%, compared to 0.25% for the investment grade funds). We’ve alternated the high yield and investment grade funds in our ladder, to create a nice mix of safety and yield, but if you have a lower or higher risk tolerance, feel free to adjust your own bond ladder accordingly. Note that the last letter in each of Guggenheim’s ETFs corresponds to the maturity year, so if you’re constructing a four-year ladder starting in 2017, your funds should end in H, I, J and K, whether you’re using high yield or investment grade funds.
Next ex-div dates: all March 1, 2017 est.
BUY – Home Depot (HD 137 – yield 2.0%) – Home Depot will report fourth quarter and full-year results February 21, before the market opens. Analysts are expecting quarterly EPS of $1.33 and full-year EPS of $6.34, up 13.7% and 17.4%, respectively. Revenues are expected to show 6.3% growth for the full year, to $94.12 billion, and 3.6% growth in the fourth quarter (to $21.74 billion). HD is trading near the top of its multi-month range ahead of the announcement.
Next ex-div date: March 7, 2017 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%) – PGX is an ETF that owns preferred shares, a type of debt issued mostly by financial companies. The ETF can be affected by interest rate changes but usually trades in a fairly low-volatility range between 14 and 16. Investors looking to add reliable monthly income (without capital appreciation) to their portfolio can buy PGX below 15.
Next ex-div date: February 15, 2017 est.
HOLD – J.M. Smucker (SJM 140 – yield 2.1%) – SJM appears to have put in a solid bottom in November-December, and has been stealthily trending up since early January. The grocery company will report third quarter earnings February 17, before the market opens. Analysts are expecting EPS of $2.00, up 23.5%, on revenue of $1.92 billion, down 2.9%. I’ll keep SJM on Hold. The stock trades ex-dividend today.
Next ex-div date: February 8, 2017
SOLD – UPS (UPS 106 – yield 3.0%) – We sold UPS in Friday’s special bulletin, after the stock’s post-earnings breakdown worsened. At the day’s average price of 106.26, our loss was 1.6% (including dividends, we broke even). UPS is having trouble keeping margins up as direct-to-consumer e-commerce becomes a larger part of its business, while slow economic growth constrains demand for higher-margin B2B services. 2017 and 2018 EPS estimates have fallen as a result. If you still own UPS, I recommend you sell now.
Next ex-div date: February 16, 2017 est.
HOLD – Xcel Energy (XEL 42 – yield 3.3%) – Xcel reported fourth quarter and full year 2016 results Thursday. The stock is slightly higher after the announcement. Fourth quarter EPS of $0.45 beat estimates by one cent, and net income was 8.8% higher year over year. For the full-year, EPS rose 5.7% to $2.21, also one cent above estimates. Net income rose 14% to $1.12 billion. Management reaffirmed 2017 earnings guidance of $2.25 to $2.35 per share. XEL is a Hold for long-term income investors.
Next ex-div date: March 21, 2017 est.
Closing prices as of February 7, 2017
